Company car tax: what you need to know

If you pay company car tax, could you be driving a better car and paying less? Quite possibly. We explain how to play the benefit-in-kind tax system and come out on top, financially and as a car enthusiast

If there is a third certainty in life, it is surely that all matters relating to taxation will be horribly complicated.

Company car tax is no exception, and when changes are made to the system on a seemingly annual basis and the tax bands themselves are fiddled with just as often, the complexity of it all spirals out of control.

However, the reason why Her Majesty’s Revenue and Customs (HMRC) charges tax on the car your employer makes available to you is at least easy enough to understand. A company car is a benefit second only to the salary you are paid and HMRC therefore sees it as a taxable one. It calls it a ‘benefit in kind’, a term applied to any taxable perk or incentive other than your basic salary.

So if you run a company car, you will have to pay a certain amount of tax. A company car is defined as one that is made available to you by your employer and that you are allowed to use personally outside of working hours, as well as for work. HMRC considers your commute to and from work to be personal use.

Calculating the amount of tax you’ll be liable to pay appears daunting at first, but it is actually reasonably straightforward. We’ll take a closer look at that later on. But put simply, the calculation is based upon the value of the car, your salary, the car’s CO2 emissions and the type of fuel it runs on. CO2 is the primary factor here because the government wants to incentivise us all to drive cleaner cars. Therefore, the lower the car’s CO2 emissions, the less tax you pay, all other things being equal.

In recent years, there have been significant changes to the way company car tax is structured. Diesel cars are subject to a 4% surcharge because they emit more nitrogen oxide, which is harmful on a local level. This was increased from 3% in April this year as part of the government’s efforts to discourage us from driving diesels. Meanwhile, electric and hydrogen fuel cell cars are no longer exempt from company car tax, although they do sit in a much lower tax band.

Another big change was made last year that concerns employees who are offered the choice between a company car and a car allowance, which is simply a sum of money paid on top of a basic salary. It usedto be the case that such employees were taxed according to the option they settled for. So if they chose the company car, they would pay tax based on its value, but if they chose the cash alternative, they’d pay tax on that sum. It was therefore possible to reduce your tax liability by choosing a company car whose value was much less than the car allowance that had been tabled.

Now, however, HRMC collects tax on whichever has the highest value. In effect, the change closes a loophole and removes one of the ways in which your tax bill could be lowered.

Put simply, it means more money in HM Treasury’s coffers.

Calculating your company car tax bill:

First of all, it is worth knowing that the 29 company car tax bands – which are based on CO2 emissions – are adjusted annually, so your tax bill will rise slightly year on year. Your employer will deduct yourtax payments from your salary each month, just as it deducts your income tax and national insurance contributions. That means you don’t have to do anything yourself, but you must make sure your employer has calculated your tax liability correctly.

Your tax bill depends on the car’s CO2 emissions, its value and your salary. The CO2 emissions correlate to a tax band, expressed as a percentage. (All percentages here relate to the 2018-19 tax year.) Thevalue of the car includes its list price and all optional extras, and HMRC refers to this as its P11D value. Your rate of income tax – basic at 20%, higher at 40% or additional at 45% – is the third factor.

The more CO2 a car emits, the more of its value is taxed. For instance, if the car emits 120g/km of CO2 and runs on petrol, you will pay tax on 25% of its value. The lowest rate, for cars emitting 0g/km of CO2, is 13%, and the highest rate is 37%.

Once you have worked out the tax band, apply the relevant percentage to the car’s P11D value to find its benefit-in-kind value. By way of example, a BMW 520d M Sport emits 117g/ km of CO2 and sits in the 28% tax band (including its 4% diesel surcharge caused by the Real Driving Emissions test, for which no car yet meets the standard). Its P11D value is £40,515, so tax will be 28% of that, meaning a benefit-in-kind value of £11,344.

Once you have that figure, multiply it by your income tax rate. Using our example above, £11,344 multiplied by 40% (assuming higher-rate income tax) means an annual bill of £4538. Therefore, that particular car will cost £378 each month.

In some cases, a company car driver’s bill will be reduced if the driver contributes to the monthly lease cost of the car, or if the car is only available to the driver part-time.

At the start of the new financial year in April, the company car tax rates will be adjusted - inevitably they're going up. Rates for new petrol cars, and diesel cars complying with the new RDE 2 emissions standard (few will be certified as complying until 2020), will rise by £5 for models emitting between 90g/km and 150g/km CO2.

Rises are greater beyond that, with cars emitting over 255g/km paying £65 more. New, non-RDE 2 diesels (most of them) will pay £5 more in a range from 75g/km to 130g/km CO2 and a higher figure beyond that, peaking at £65 more for a diesel emitting over 255g/km.

Meanwhile, the fixed standard rate will increase from £140 to £145 for petrol and diesel cars. The five-year premium rate will rise by £10 to £320. Many older cars registered before 1 April 2017 will also incur a tax rise of between £5 and £15, although those emitting less than 120g/km CO2 will be spared.

Petrol vs diesel:

The 4% surcharge on diesel cars is there to discourage us from choosing diesels and persuade us into supposedly cleaner petrols. That may seem punitive, but because diesel cars emit less CO2 than their petrol equivalents, even after the surcharge is applied, the difference in tax liability between the two may not be significant.]

For drivers who cover higher than average mileage, meanwhile, the benefit of better diesel fuel economy will probably outweigh the 4% surcharge. Let’s look at three examples.

This comparison looks at two mid-range Ford Fiestas with no optional extras. The petrol one emits 110g/km of CO2 and sits in the 23% tax band. The diesel emits 107g/km but, after the 4% surcharge, slots into the 26% band. Our driver is a basic-rate tax payer.

Each month, the petrol car will cost £70 in company car tax and the diesel will cost £85. Our driver covers only 500 miles each month. The petrol will return 60.1mpg, the diesel 67.3mpg. That means our driver’s monthly fuel cost in the petrol car is £49 and in the diesel £46. Therefore, the petrol model is cheaper overall by £12 per month. However, if our driver instead covers 2000 miles a month, the two cars will cost exactly the same amount in company car tax and fuel costs.

Let’s assume our company car driver is a higher-rate tax payer who drives 1500 miles per month. The petrol 520i emits 134g/km of CO2 and is in the 27% bracket. The 520d diesel emits 119g/km and sits in the 28% band. The petrol BMW will therefore cost £355 per month compared with £378 for the diesel.

Each month, the petrol car will cost £177 to fuel compared with £145 for the diesel, so overall the diesel works out cheaper by £9 per month. However, if the driver covers only 1000 miles per month, the petrol is the cheaper choice by £2.

Our driver is an additional-rate tax payer and covers 2000 miles per month. The petrol S-Class emits 169g/km of CO2 and falls in the 34% tax bracket, while the diesel S-Class emits 153g/km and slots into the 35% bracket.

The petrol car will cost £1099 per month while the diesel will cost £1103.

Each month, the petrol S-Class will therefore cost £1410 in tax and fuel compared with £1352 for the diesel one

Zero- and low-emission cars:

Having once been exempt from company car tax, zero-emission cars – full-electric and hydrogen fuel cell vehicles, in other words – now carry a 13% tax liability. That will rise to 16% in the new tax year. Meanwhile, cars that emit between 1g/km and 50g/km of CO2 also sit in the 13% category, while emissions of 51g/km to 75g/km place a car in the 16% tax band. The government considers any car that emits less than 75g/km to be an ultra-low-emission vehicle (ULEV). There are no pure-petrol or diesel cars that qualify – only EVs, fuel cells and plug-in hybrids. Again, let’s look at some examples.

The BMW i3S is one of our favourite small electric cars, being both cleverly packaged and fun to drive. Its P11D value before options is £34,020 and its benefit-in-kind value is £4800, which means basic-rate tax payers will pay £80 per month, higher-rate payers £160 and additional-rate payers £180 per month.

In the new tax year, when EVs move into the 16% tax band, those figures rise to £98, £196 and £221. In the case of additional-rate tax payers, therefore, the annual cost of an i3S company car is set to rise by £492.

The plug-in hybrid version of the Toyota Prius has CO2 emissions of 28g/km and slots into the same 13% tax band as any zero-emission car. This means company car drivers can benefit from the same very low tax rate as a full-electric car, but with the range and flexibility of a conventional petrol or diesel car.

Meanwhile, the Toyota Prius hybrid (that is, not the plug-in model) emits 78g/km of CO2 and therefore sits in the 19% tax bracket. However, at £23,945, the hybrid model is £7640 cheaper than the plug-in. Even so, the plug-in model would cost a higher-rate tax payer £137 per month while the hybrid would cost £152.

With CO2 emissions as low as 52g/km, the plug-in hybrid Volvo XC60 demonstrates that bigger cars can slot into the ULEV category as well. It has a P11D value of £53,800 and falls into the 16% tax bracket, giving it a benefit-in-kind value of £8608.

Very few basic-rate tax payers would imagine they could afford a large SUV, but the XC60 T8 Twin Engine would cost them just £144 per month (so long as it was offered on their company car scheme, which is a long shot). A higher-rate tax payer, meanwhile, should expect to fork out £287 per month for this Volvo

Tax busters:

Choose your company car wisely and you could find yourself driving one of the fastest or most luxurious cars on sale while paying very little company car tax. The trick is to look out for plug-in hybrids that slot into the sub-75g/km ultra-low-emission vehicle category. If your employer offers such a model, then you’re on to a winner – although WLTP disruption has meant some hybrids are temporarily not on sale.

It isn’t only drivers of six-figure-price luxury cars that can benefit from driving a plug-in hybrid. At £45,810, the BMW 530 iPerformance plug-in costs one-third of the price of the Porsche Panamera highlighted below but it, too, is a swift and luxurious executive car.

Slotting into the 13% tax band, it will cost a higher-rate tax payer £212 per month. That compares very favourably with the petrol-only 530i, which has almost identical performance figures but, at £419 per month, would be almost twice as expensive.

One of the fastest-accelerating cars on the road has a 31-mile electric-only range and its CO2 emissions of 66g/km place it in the 16% tax bracket. With a P11D value of £137,140 and a benefit-in- kind value of £21,942, it’ll cost an additional-rate tax payer £823 per month. But there’s a temporary caveat: because of WLTP, it is currently not available to order.

By comparison, the petrol-only BMW M5 that offers similar luxury and performance would cost £1220 each month, which is close to £5000 more than the plug-in Porsche each year.

It may to be a few years old, but the BMW i8 is still one of the most eye-catching cars on the road. And although it doesn’t match a Porsche 911 for sheer driving thrills, the i8 is great to drive in its own way. With CO2 emissions of 42g/km, it slots into the lowest, 13% tax band. Its P11D is £112,680 and its benefit-in-kind value £14,648, so an additional-rate tax payer will pay £549 per month for it.

The £100,781 Porsche 911 Carrera 4 GTS, meanwhile, would cost the same driver £1398 per month – an additional £10,000 each year.

How will WLTP affect company car drivers?

The WLTP fuel consumption and emissions test, introduced only last month, is having a knock-on effect for company car drivers. Ultimately, closer to real-world fuel efficiency and CO2 emissions data will benefit everybody, but right now certain issues have arisen. Manufacturers have been tasked with retesting every variant of every model they build, which has proven to be an onerous undertaking. As a result, order books for a number of model derivatives have been temporarily closed while those car makers work through the backlog. That means many company car buyers haven’t been able to order the exact car they had their eye on.

One company in the know, CLM fleet management, estimates that the new WLTP rules give CO2 emissions data that are around 10% higher across the board on average than the outgoing NEDC system. For the time being, though, HMRC will continue to use the old NEDC figures for benefit-in-kind calculations. To convert the new WLTP data back into line with the old system, HMRC uses a formula known as CO2MPAS.

Unfortunately, the formula isn’t perfect and it still presents CO2 figures that are slightly higher than they were under NEDC, before WLTP’s introduction, which is having a financial impact on company car buyers. HMRC hasn’t said when it will switch fully to the new system, but 2020 has been hinted at when the Real Driving Emissions test will be ready.

Not a bad write up of the situation but a few omissions For drivers with a choice of company car or cash now being taxed on whichever would result in the highest tax bill, despite which one they choose - There is an exemption if they pick a ULEV vehicle.

Many in this group will be perk cars mainly used for commuting so a plug in hybrid would be ideal reducing the drivers cost in tax and fuel.

Whilst benefit in kind rates peak in 2019/20 tax year, a 'reset' is already published for 20/21 so if taking on a long term lease the driver needs to think ahead, EV will drop from 16% to 2%, typical 30 to 39 mile range plug in hybrids will only go down to 12%. All other vehicles will either remain about the same or be ramped up as usual.

Claims WLTP correlated NEDC figures rises are about 10% is being a bit generous, nearly all cases its been 10 to 20 percent. The ones that have not risen considerably have usually been modified or tweaked by the manufacturer as part of a refresh, in some cases the testing has not been 'onerous' rather than the manufacturer is reluctant due to the rises being so high as to suggest some 'creativity' went into the their previous NEDC figures.

Despite the switch to WLTP testing, which has caused cars to have higher CO2 ratings, the government has totally refused to acknowledge this and not pledged to re-adjust the BIK table to compensate. It looks pretty likely they intend doing nothing and just pocketing the overnight substantial tax hikes it will bring into the treasury. We will see in the budget. Despicable.

It would be 'helpful' if manufacturers could squeeze just a mere few more miles out of PHEVs to reach 40 miles range. For 20/21 this would see a BIK rate of only 8%.

Even humdrum, run of the mill cars with low powered engines cost a damn fortune in tax. £137 a month just in tax for a Prius! 20% rate almost irrelevant, inflation has pushed the salary for most jobs with a company car into the 40% tax bracket. It's barely worth having a company car under this swingeing tax regime. So much for a conservative government...

Totally agree. I hadn't realised just how much company car tax had gone up. 10 years ago I was paying less than £50 month in tax on a well specced Focus. I think the Government have gone too far with this. Whilst some don't really need a car for their job and it is a perk, for others it is essential for the job and perfectly reasonable for employers to provide a suitable vehicle. I'm also puzzled by how the car allowance is taxed. How is it a loophole if someone choses a cheaper car so they pay less tax? That's simply an individual's choice.

Totally agree. I hadn't realised just how much company car tax had gone up. 10 years ago I was paying less than £50 month in tax on a well specced Focus. I think the Government have gone too far with this. Whilst some don't really need a car for their job and it is a perk, for others it is essential for the job and perfectly reasonable for employers to provide a suitable vehicle. I'm also puzzled by how the car allowance is taxed. How is it a loophole if someone choses a cheaper car so they pay less tax? That's simply an individual's choice.

The 'loophole' was a contradiction in that as they ramped up the BIK table, people were switching over to taking the car allowance instead. Free of CO2 related tax people were going for high emission vehicles again as it made no difference tax wise (noticed a lot of Mustangs on the road now?). This is why cashtakers who opt for ULEV's were given a loophole to get out the new rules as supposedly that is what the government want, to get more people into cleaner cars.There is only one way out of this at the moment, companies say we will not provide you with a vehicle at all, its up to you to use your own when required for business and we will pay you the tax free Mileage Allowance Payments (MAPs 45p/25p).

Instead of paying the employee a car allowance they would just increase salary for jobs with substantial travel. That combined with the quite generous MAP rates should cover them running a suitable own vehicle.

Sound like a good plan? then part 2 of the 'trap' kicks in, health and safety. Any employee travelling for their work, even in their own vehicle remains the responsibility of their employer, who should take all reasonable measures to ensure they are legally driving a suitable and well maintained vehicle. Prosecution and jail terms for senior management if the employer is injured due to a failing in one of these areas can and has happened. Its enough to scare the shit out of them so most companies handed it over to lease companies to manage in good faith they would ensure the vehicles were maintained.

Directors point of view, so what if the underlings pay through the nose in tax and lease costs? at least I won't go to jail when a wheel falls off. Who can blame them.

Our company car list is pretty mundane, Focuses, low spec Golfs, the odd crossover etc. Only hybrids are Yaris' and Auris', others too expensive for the company. No BEV's, again too expensive to lease. BIK tax for us, who are generally around/just above the 40% tax threshold, is therefore £180 per month plus. As a result we are mostly now returning our cars as the leases end and funding our own cars from the 45p per mile fuel allowance and saved BIK tax.

If this is a trend nationwide the HMRC will have to change it all again as theyll be losing out.

Our company car list is pretty mundane, Focuses, low spec Golfs, the odd crossover etc. Only hybrids are Yaris' and Auris', others too expensive for the company. No BEV's, again too expensive to lease. BIK tax for us, who are generally around/just above the 40% tax threshold, is therefore £180 per month plus. As a result we are mostly now returning our cars as the leases end and funding our own cars from the 45p per mile fuel allowance and saved BIK tax.

If this is a trend nationwide the HMRC will have to change it all again as theyll be losing out.

Not forgetting also the WLTP fiasco where cars were retested under new scheme and nearly all ended up with higher CO2 ratings, average at least 10% up but some as much as 20% so overnight they moved up the bands and the tax revenue shot up. The government SHOULD have adjusted the table downward in September to keep parity. Did they hell !!!! just stuck their fingers in their ears and quite hapilly pocketing 100's millions more tax.

The Government needs to review the current company car scheme which has become chaotic and over punitive. The change to WLTP which was supposed to benefit consumers has further hit company car drivers with increased Co2 ratings leading to higher tax bandings. PHev’s remain too expensive for most drivers to choose and the real World MPG is often poor. For many drivers a company car remains the only financially viable option. However, the Government needs to take care not to cook the Golden Goose, as the levels of taxation now being charged will inevitably mean more and more people move away and choose to personally fund their vehicle, removing tax revenue and also leading to an increase in Co2 emissions as they are no longer incentivised to choose a car based on its Co2 ratings. Short sighted politicians and civil servants need to take heed!

The Government needs to review the current company car scheme which has become chaotic and over punitive. The change to WLTP which was supposed to benefit consumers has further hit company car drivers with increased Co2 ratings leading to higher tax bandings. PHev’s remain too expensive for most drivers to choose and the real World MPG is often poor. For many drivers a company car remains the only financially viable option. However, the Government needs to take care not to cook the Golden Goose, as the levels of taxation now being charged will inevitably mean more and more people move away and choose to personally fund their vehicle, removing tax revenue and also leading to an increase in Co2 emissions as they are no longer incentivised to choose a car based on its Co2 ratings. Short sighted politicians and civil servants need to take heed!

99% agree, except they already took measures to make sure the Goose kept laying, if you need to be mobile your company has to give you a car or an cash allowance or your not going to take the job if you have to fund your business travel yourself.

So they have added a system where even if you just get an allowance and buy/run your own car they will tax it as if it was a company car on BIK, if that gets HMRC more of your money than the basic rate tax on the allowance would have.So that 'loophole' is gone, if you take the cash and buy a high CO2 car you will get hammered same as a company car.The only option currently is to take the cash and get a hybrid or EV (any ULEV category) as they are exempt from the extra clause, currently! You will still pay your current tax rate on the cash allowance though.So hybrids are far from dead yet, you can see why EV's like the Kona which are viable alternatives to an ICE car are flying off the shelf, I suspect Kia will be shifting a fair few Niro's too. Plenty of room in the market for sensibly priced hybrids, not enough manufacturers making them though. JLR are you listening?